Kuroda Stares Down Bond Volatility With Stimulus Unchanged

Bank of Japan policy makers refrained from expanding their tools to address bond-market volatility, sticking with an April plan to double the monetary base as they seek to rekindle inflation and stoke growth.

BOJ Governor Haruhiko Kuroda and his fellow board members left unaltered the one-year fixed-rate loan facility the bank has tapped seven times amid a surge in 10-year government bond yields from a record low in April. At a press briefing in Tokyo, Kuroda said that the central bank will discuss longer funding operations if they become necessary.

The yen advanced after today’s announcement, and stocks retreated, as investors assess whether Kuroda and Prime Minister Shinzo Abe’s initiatives to revive the world’s third-largest economy will prove effective. One concern at the BOJ is any return to an incremental strategy of responding to market turmoil that failed in the past, said Hiroshi Shiraishi, senior economist at BNP Paribas SA in Tokyo.

“Kuroda really doesn’t want the BOJ to be seen as going back to the era of gradualism,” Shiraishi said. He wanted “to deliver a clear message that the most important goal is inflation and it’s natural for yields to rise in the process of meeting the target,” the analyst said.

The yen jumped after the decision, trading 0.7 percent higher at 98.03 per dollar as of 5:23 p.m. local time, while still down about 12 percent this year. The Topix index fell 1 percent. Ten-year yields were at 0.880 percent, compared with a record low of 0.315 percent on April 5 and a high of 1 percent on May 23. Over the two weeks through yesterday, diminished volatility saw yields range from 0.800 percent to 0.965 percent.

Reduced Volatility

“We have concluded that we don’t need to have a new tool for now as volatility has been greatly reduced amid our efforts for flexible operations,” Kuroda said. “We will discuss when needed” any extension to the one-year limit, he said, adding that “I haven’t seen the need for it so far.”

Policy makers stuck with an April pledge to increase the monetary base by 60 to 70 trillion yen ($713 billion) per year. Kuroda said that the central bank has more scope to increase purchases of exchange-traded funds than of Japanese real-estate investment trusts, or J-REITs.

“The ETF market has the whole stock market behind it, and there is room there, but the J-REIT market is not so big, and it is hard to increase purchases by a large amount in a short period of time,” Kuroda said. He added that a 140 billion yen total for BOJ purchases of J-REITs, announced in April, was a target, not an upper limit.

Not ‘Swayed’

The BOJ also said that 3.15 trillion yen of loans will be extended to 70 major and regional banks on June 20 through a program set up under former Governor Masaaki Shirakawa.

Today’s decision “sends a signal that Kuroda won’t be swayed by short-term swings and volatility in bond yields,” said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute Inc. in Tokyo and a former BOJ official. According to Shiraishi, the central banker also avoided the mixed message of expanding bond-buying options for financial institutions while simultaneously trying to push them into holding riskier assets.

Japan bears the world’s biggest public debt burden, with the International Monetary Fund last month urging a “concrete and credible” plan for fiscal consolidation. The IMF said last year that the nation’s borrowings may amount to 245 percent of its economic output this year.

BOJ Division

Officials before the meeting were divided over whether to extend the loans to a two-year horizon, people familiar with the discussions said last week. Twenty of 23 analysts in a Bloomberg News survey forecast that the BOJ would approve loans of two years or longer at today’s meeting or said that such a move was possible.

The BOJ upgraded its assessment of exports and production today, saying both are “picking up,” and also saw some initial progress toward pulling the nation out of 15 years of deflation. Annual consumer-price changes are “likely to gradually turn positive,” the bank said, a switch from saying on May 22 that the benchmark gauge was “expected to register smaller declines for the time being, and thereafter is likely to gradually turn positive.”

First used on April 11, the fixed-rate funding operations have been employed to smooth volatility that flared in the bond market after Kuroda’s April 4 pledge to double the amount of money in the economy over two years. The BOJ has so far offered 13 trillion yen in the 0.1 percent interest-rate operations, with banks and financial institutions taking up a total of 10.4 trillion yen.

‘Third Arrow’

Price swings in Japan’s government bonds maturing in more than a year have almost halved in the past two months. Volatility has declined to 3.79 percent since it reached 6.86 percent on April 16, the highest since September 2003 on a 10-day reading basis, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Abe failed last week to impress investors with details of his economic growth strategy, the “third arrow” of Abenomics to accompany fiscal and monetary stimulus, triggering a drop in shares and a rise in the yen. The economy is “picking up,” the central bank said today, after a revised report yesterday showed annualized growth of 4.1 percent in the first quarter, the fastest pace in a year.

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